Asia’s financial markets are on the verge of collapse.
Currencies are collapsing, forcing central banks to provide them with support. Stock prices are falling, credit risk is rising and borrowing costs are rising across the region.
It is the twin catalysts of ever-rising US interest rates and rising tensions in the Middle East that are causing suffering everywhere. A rising yield premium on U.S. Treasury bonds is sucking capital into the U.S. from the rest of the world, while the threat of escalation in the Israel-Hamas war is weakening demand for assets considered riskier.
Asian stocks fell to an 11-month low overnight on Friday. The consequences are widespread this month. Red October raged on in global markets on Friday as the sight of U.S. Treasury yields hitting 5% for the first time since 2007 amid an increasingly threatening conflict in the Middle East sent investors scrambling for safety.
Wall Street has lost 2% in the last two days and European stock markets fell 1% on Friday.
And it’s proving almost too much for the Asian markets.
The Malaysian ringgit slipped past its 2022 low on Thursday, reaching its weakest level since the Asian financial crisis in 1998. Measures of implied volatility for the Japanese yen rose as it traded just shy of 150 per dollar, raising concerns stoked that the authorities would step in to support the currency. The Indian rupee hit a record low and the Bloomberg Asia Dollar Index fell to its weakest level since November.
Several central banks in the region, including that of the Philippines, are actively intervening in foreign exchange markets to prevent currency weakness, fearing that the resulting increase in import costs would fuel inflation. Indonesia’s central bank on Thursday took the surprise step of raising borrowing costs, in what Governor Perry Warjiyo called a “pre-emptive and forward-looking step” to strengthen the rupiah.
Separate data showed Chinese investors dumped the most U.S. bonds and stocks in four years in August, fueling speculation that authorities were bolstering their war chests to defend a weakening yuan. China’s bonds are yielding their lowest yield compared to U.S. Treasuries since 2002, weighing on the country’s currency.
The violence in Israel is increasing strains in the region. Bank of Korea Governor Rhee Chang-yong warned on Thursday of the risk of market unrest due to the conflict. Across the region, stocks fell, with gauges in mainland China nearing their 2022 low.
“There is portfolio de-risking, likely by raising cash in anticipation of escalating geopolitical risks in the Middle East due to a possible Israeli ground invasion of Gaza and possible violent retaliation against Israel,” said Alan Richardson, senior portfolio manager at Samsung Asset Management.
Bonds are also under pressure in Asia as investors demand higher yields to compete with yields available in U.S. markets. This is driving up financing costs for governments and companies in the region. Several Japanese corporate bond sales have recently been postponed or canceled due to market conditions.
And spreads on investment-grade Asia ex-Japan U.S. dollar bonds rose at least two basis points on Thursday, on track for the widest widening in about two weeks.
It’s all designed to keep Asia’s central bankers and the region’s investors on their toes.
“The global dynamics are very fast,” said Bank Indonesia’s Warjiyo. “We have to check again month to month. Our goal is the same: price stability, financial system stability and payment system stability to support our economic growth.”
Disclaimer: This article first appeared on Bloombergand is published under a special syndication agreement.
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